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Secondaries sidelines

Cash-strapped LPs have been given a reprieve as GPs have slowed capital calls, but that in turn has kept fund interests off the secondaries market, writes Christopher Witkowsky.

It’s no secret that buyer-seller disputes over pricing and discounts have kept secondaries activity slower than pundits had initially predicted.

But another factor impeding the sell-off everyone’s been waiting for is driven by GPs that have slowed down capital calls, either because they’re not doing deals or to simply give LPs a break.

Christopher
Witkowsky

Speakers at a recent PEI forum said the slowdown in capital calls is allowing liquidity-starved LPs to “sit on the sidelines” and hold fund interests they would otherwise feel pressure to sell in order to fund new capital calls. LPs like public pensions now have the time to wait and hope the market rebounds, boosting the value of their sinking portfolios. To be sure, some high-profile university endowments and charities have selectively turned to the secondaries market in recent months, but the only real “forced” sellers today are listed funds of funds whose banks have cut off their credit lines, according to several speakers.

As a result, many of the fund interests up for sale today are not “quality” funds that professional secondaries buyers see as attractive investments, but recent vintage mega-funds that are all but “unsalable”, according to one speaker.

Until the quality of assets for sale changes, most veteran secondary players will also wait on the sidelines, leaving “tourists” and non-traditional buyers left to transact with forced sellers.

This impasse between traditional buyers and sellers is encouraging the slowdown market particpants observe: one established secondaries GP noted that this year, transacted deals account for only about one-tenth of the value of last year’s closed deals.

Those fractions aren’t likely to improve until LPs really feel pressure to restructure their portfolios – whether that’s to gain liquidity for future capital calls, or simply to more actively manage existing assets.